2019 (May)
COMMERCE (General)
Course: 404 (Indian Banking System)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
1. (a) Fill in the blank: 1x4=4
1) Fourteen Indian commercial banks were nationalized in the year 1969.
2) The Bank of Hindostan was the first banking institution established in 1770.
3) The Reserve Bank of India adopts minimum reserve method for issuing notes.
4) The full form of RTGS is Real Time Gross Settlement.
(b) Write True or False: 1x4=4
1) The Imperial Bank was not given the power of issuing note. True
2) Functions of development bank and commercial bank are not same. False
3) The earlier name of the Reserve Bank of India was Imperial Bank. False
4) The State Bank of India was the first bank in India to launch credit card. False, Central Bank of India
2. Write short notes on (any four): 4x4=16
a) Public sector bank: Public Sector Banks are those banks in which majority stake (i.e., more than 50% of the shares) is held by the government of the country. The words such as “The” or “Ltd” will not be found in their names because the ownership of these banks are with the government and the liability is unlimited in nature. Some examples of public sector banks in India include Andhra Bank, Canara Bank, Union Bank of India, Allahabad Bank, Punjab National Bank, Corporation Bank, Indian Bank and so on. In public sector banks required employees are appointed by the Government. The profits earned by the public sector banks go to the Government.
b) Lead bank scheme: Under the lead banking Scheme a particular bank was made responsible for a particular district to develop banking and credit in that district. This scheme was framed for surveying and developing the banking potential of all the districts in the country. This scheme was introduced by the RBI on 12 dec, 1969. The concept of a lead bank was formulated in order to involve commercial banks in rural development.
Objectives and Functions of Lead banking scheme
a) To ascertain the scope of development of banking in the allotted district.
b) To ascertain unbanked areas within district for mobilization of savings.
c) To ascertain the credit needs of business and industrial units in the allotted district and extend credit facilities to them.
d) To provide financial assistance to other institutions in the allotted district.
e) To make provisions for training of small farmers so as to ensure proper utilization of funds.
f) To make provisions for storage, repairing and services of agricultural equipments.
g) Co-ordination of the activities of commercial banks, co-operative banks and other financial institutions in the allotted district.
Benefits/Effects of Lead bank
a) Branch expansion: There was found more effectiveness in branch expansion, supervision and guidance after introducing the Lead Bank Scheme.
b) Co-operation: There was found more co-operation among commercial bank, Co-operative bank, other financial institution and government authorities after introducing the Lead Bank Scheme.
c) Identification: Identification of unbanked area within district was possible through Lead Bank Scheme.
d) Credit facilities: Extending credit facilities in allotted district.
e) Facilities to farmers: Provisions for training of small farmers so as to ensure proper utilization of funds and to make provisions for storage, repairing and services of agricultural equipments.
c) Group banking: Group Bank is a system of banking under which there will be holding company controlling the subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary companies may carry out banking business. An example in India is SBI which has many subsidiary banks such as State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Travancore. These subsidiaries carry out banking and other operations such as leasing, merchant banking and so on.
Merits of Group Banking: Following are the advantages of Group Banking:
a) Efficient Management: The holding company stimulates efficiency of the group banks. The group banks are efficiently managed being under the overall control of Holding Company.
b) Adequate Liquidity: there is high degree of liquidity of the concerned group being the whole group of banks is controlled and managed by one parent company. The member banks have to maintain the requisite degree of liquidity.
c) Economical: It is an economical system of banking, because many expenses such as advertisement and publicity are done collectively be the group as whole under the direct control of the holding company.
d) Specialization: In Group banking, different subsidiary companies tend to specialize in different aspects of banking. This promotes the overall efficiency of the group system.
Disadvantage of Group Banking: Main demerits of Group Banking are as under:
a) Right Control: There is rigid control in Group Banking due to lack of flexibility which often leads to corruption.
b) Less Mobility of Funds: Funds are less mobile in Group Banking than Branch banking system.
c) Few Branches: Group Banking has relatively very few branches as compared to Branch Banking system.
d) Regional rural bank: Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural laborers and rural artisans. The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State.
The Regional Rural Banks (RRBs) have been set up to supplement the efforts of cooperative and commercial banks to provide credit to rural sector. The following were the reasons or need set up the RRBs:
1. To free the rural poor, small and marginal farmers from the clutches of money lenders
2. To provide credit to small farmers, marginal farmers, rural artisans, landless laborers who do not fulfill the criterion of creditworthiness as per the banking principles.
3. To provide banking services to the rural community at a relatively lower cost by adopting a different staffing pattern, wage structure and banking policies.
e) Universal banking: As Narrow Banking refers to restricted and limited banking activity Universal Banking refers to broad based and comprehensive banking activities. Under this type of banking, a bank will deal with working capital requirements as well as term loans for developmental activities. They will be dealing with individual customers as well as big corporate customers. They will have expanded lines of business activity combining the functions of traditional deposit taking, modern financial services, selling long-term saving products, insurance cover, investment banking, etc.
Advantages of Universal Banking
a) Economies of Scale: Universal banking results in greater economic efficiency in the form of lower cost, higher output and better products. It enables the banks to exploit economies of large scale and wider scope.
b) Easy Marketing of Services: A bank with established brand name can easily use its existing branches and staff to sell the other financial products like insurance policies, mutual fund plans without spending much effort on marketing.
c) One-stop Shopping: One-stop shopping is beneficial for the bank and its customers as it saves lot of transaction costs by increasing the speed of economic activities.
Disadvantages of Universal Banking
a) No Expertise in Long Term Lending: These are different types of long term loans like project finance and infrastructure finance, having long gestation projects can not properly handle by the single bank.
b) Non-performing Assets problem: One of the most serious problems faced by universal banking is Non-performing Assets.
c) Bureaucratic and inflexible: Universal banks tend to be bureaucratic and inflexible. They tend to work primarily with large established customers and ignore or discourage smaller and newly established businesses.
f) Objectives of bank nationalization: Objectives (Reasons) Behind Nationalisation of Banks in India
1. To reduce monopoly practices: Initially, a few leading industrial and "business houses had close association with commercial banks. They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses. Nationalisation of banks, thus, prevents the spread of the monopoly enterprise.
2. Social control was not adequate: The 'social control' measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, the nationalisation was necessitated by the failure of social control.
3. To reduce misuse of savings of general public: Banks collect savings from the general public. If it is in the hand of private sector, the national interests may be neglected, besides, in Five-Year Plans, the government gives priority to some specified sectors like agriculture, small-industries etc. Thus, nationalisation of banks ensures the availability of resources to the plan-priority sectors.
4. Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private sector has failed. Because of such rapid branch expansion there is possibility to mobilise rural savings.
5. Advance loan to agriculture sector: If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population depends upon agriculture. Thus, for providing increased finance to agriculture banks have to be nationalised.
3. (a) Explain the role of commercial banks in economic development of a country. 14
Ans: Role and Importance of Commercial Banks/SBI in our economy
Banks play an important role in the economic growth of a country. In the modern set up, banks are not to be considered dealers in money but as the leaders of development. The importance of bank for a country’s economy can be explained in following ways:
1. Promotion of Savings and Capital formation: Banks by providing attractive interest rate on deposits try to promote thrift and savings in an economy. The investment of these savings in productive channel results in capital formation. So, to mobilise savings towards entrepreneurs for productive purpose, sound banking system is essential. The banks help in capital formation in the country. A high rate of saving and investment promote capital formation.
2. Increasing productivity of small savings: The scattered small savings in the country can be put to optimum use by commercial banks. Banks utilize this amount by giving loans to industrial houses and the government. By providing funds to the entrepreneurs, bank help in increasing productivity of capital.
3. Remittance of money: Banks help in remitting money from one place to another. The cheque, bank draft, letter of credit, bills, hundies enable traders to transfer large sums of money from one place to another. without an efficient mode for exchange of money, the growth of trade, commerce and industry is impossible.
4. Helps in credit creation: By their ability to create credit, the banks have placed at the disposal of the nation a large amount of money. The bank can increase the supply of money through credit creation. Credit creation leads to increased production, employment generation, higher sales which leads to faster economic development.
5. Employment generation: With the growth of banking activity, employment opportunity in the country has increased to a considerable extent. Different banks are regularly opening branches in both rural and urban which leads to employment generation in different parts of the country.
6. Safety of valuables: Money deposited in the bank and other precious items are now absolutely safe. For keeping valuables, banks are providing locker facilities. Now people are free from any type of risks.
7. Financing industrial sector: Banks provide both short term and medium term loans to all types of industries. In a developing countries like India, small and medium scale industries plays a significant role. By providing loans to SMEs banks play a significant role in the economic development of our country.
8. Banker to the government: Banks also act as a banker to the government and banks. To provide long term finance to the government, bank invests their funds in the government securities and TB.
Or
(b) Discuss in detail about the classification of banks in India. 14
Ans: Various Types of Banks
There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession etc. The banking institution may be divided into following types:
A) Based on the Structure or Organizational Setup: Banks can be of five types based on the structure or organizational setup, viz., unit bank, branch bank, group bank, chain bank and correspondent bank.
1) Unit Bank: Unit Bank is a type of bank under which the banking operations are carried by a single branch with a single office and they limit their operations to a limited area. Normally, unit banks may not have any branch or it may have one or two branches. This unit banking system has its origin in United State of America (USA) and each unit bank has its own shareholders and board of management.
2) Branch Bank: Branch Bank is a type of banking system under which the banking operations are carried with the help of branch network and the branches are controlled by the Head Office of the bank through their zonal or regional offices. Each branch of a bank will be managed by a responsible person called branch manager who will be assisted by the officers, clerks and sub-staff. In England and India, this type of branch banking system is in practice. In India, State Bank of India (SBI) is the biggest public sector bank with a very wide network of 16000 branches.
3) Group Bank: Group Bank is a system of banking under which there will be holding company controlling the subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary companies may carry out banking business. An example in India is SBI which has many subsidiary banks such as State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Travancore. These subsidiaries carry out banking and other operations such as leasing, merchant banking and so on.
4) Chain Bank: Chain Bank is a system under which different banks come under a common control through common shareholders or by the inter-locking of directors. An example in India is KarurVysya Bank and Lakshmi Vilas Bank having their head offices located in the same place, viz., Karur and sharing common directors by which they may have common management policy.
5) Correspondent Bank: Correspondent Bank is a bank which link two banks of different stature or size. Many Indian banks act as correspondent banks for many foreign banks.
6) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialize in short term finance only. This type of banking is popular in U.K.
7) Mixed Banking: Mixed banking is that system of banking under which the commercial banks perform the dual function of commercial banking and investment banking, i.e., it combines deposit and lending activity with investment banking. Commercial banks usually offer both short-term as well as medium term loans. The German banking system is the best example of mixed Banking.
8) Regional banking: In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State Governments and some Commercial Banks. As they are permitted to operate in particular region, it may help develop the regional economy.
B) Based on the Ownership: Banks can be of four types based on the ownership. They are public sector banks, private sector banks, foreign banks and cooperative banks.
1) Public Sector Banks: Public Sector Banks are those banks in which majority stake (i.e., more than 50% of the shares) is held by the government of the country. The words such as “The” or “Ltd” will not be found in their names because the ownership of these banks is with the government and the liability is unlimited in nature. Some examples of public sector banks in India include Andhra Bank, Canara Bank, Union Bank of India, Allahabad Bank, Punjab National Bank, Corporation Bank, Indian Bank and so on.
2) Private Sector Banks: Private Sector Banks are those banks which are owned by group of private shareholders. They elect board of directors which manages the affairs of the banks. Some examples of private banks in India include The Lakshmi Vilas Bank Ltd., The Karur Vysya Bank Ltd., The City Union Bank Ltd., HDFC Bank, Axis Bank and son.
3) Foreign Banks: Foreign Banks are those banks which belong to foreign countries and have their incorporated head office in foreign countries and branch offices in other countries. The share capital of the foreign banks will be fully contributed by the foreign investors. Some examples of foreign banks in Indian include ABM Amro bank, Standard Chartered Bank, JP Morgan Chase Bank and so on.
4) Cooperative Banks: Cooperative Banks are those banks which are run by following cooperative principles of service motive. Their main motive is not profit making but to help the weaker sections of the society. Some examples of cooperative banks in India include Central Cooperative Banks, State Cooperative Banks.
Cooperative banks are a part of the set of institutions, which are engaged in financing rural and agriculture development. The other institutions in this set include the RBI, NABARD, commercial banks and regional rural banks, cooperative banking is small-scale banking carried on a no profit, no loss basis for mutual cooperation and help. Cooperative banks were assigned the important role of delivering of fruits of economic planning at the grass roots level. Cooperative banking structure is viewed as a vehicle for democratization of the Indian financial system. They were conceived to supplant moneylender and indigenous bankers by providing adequate short-term and long term institutional credit at reasonable rates of interest.
C) Based on the Functions: Banks can be of various types based on the functions they perform. They include savings banks, commercial banks, industrial banks, agricultural development banks, land mortgage/development banks, cooperative banks, exchange banks, indigenous banks, consumer banks, central banks.
a) Central Bank: Central Bank is known as guardian bank which bank working in the country. Now a days, in every country there is one central bank and is controlled by the govt. The central Bank manages and controls the whole monetary system and also prepares monetary policy and other policies of the govt.
b) Commercial Bank: The commercial bank generally extent short terms loans to the business man and traders. They collect deposits from the public and advance loans to the businessman and producer commercial banks are normally owned by share holders. In India most of the joint stock banks are commercial banks.
c) Co-operative Bank: Co-operatives banks are those banks which established in co-operative sectors. Co-operative banks offer short term and medium term loans to the agricultural sector. Farmers get various kinds of loan for purchasing various agriculture inputs from co-operative banks.
d) Foreign exchange Banks: These are special types of banks which specialize in financing foreign trade. Their main is to make international payments through the purchase and sale of exchange bills.
e) Industrial banks: Industrial banks are those banks which advance long term loans to industries. For the development of industries various types of industrial banks are established. In India, various institution like Industrial and finance co-operation of India (IFCI), Industrial development bank of India, can be termed as Industrial Banks.
f) Savings Banks: Savings banks are those banks which offer opportunities for saving to the small savers and also try to develop saving habits among the people.
g) Development Banks: Development banks are specialized financial institutions which provide medium and long term finance to private entrepreneurs and help in economic development of the country.
h) Agricultural/Land Development Banks: Agricultural/Land Development Banks are those banks which are known as Land Mortgage or Agricultural Banks as they provide finance to agricultural sector. They provide long term loan for agriculture for the purposes of purchase of new land, purchase of heavy agricultural machinery such as tractor, repayment of old debt, conservation of soil and reclamation of loans.
i) Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry. They are also known as Industrial Banks as they are mainly concerned with industrial finance.
j) Export - Import Bank: These banks have been established for the purpose of financing foreign trade. They concentrate their working on medium and long-term financing. The Export-Import Bank of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation wholly owned by the central government.
k) Indigenous Bankers: That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages. Banking in its crude from is as old as authentic history. All throughout the period of India history, indigenous bankers and money lenders are recorded to have existed and carried on the business of banking and money lending on a large scale. Between 2000 and 1400 BC during the Vedic Period records of deposits and lending are found. Renowned Hindu Law giver Manu has dealt with the matter of deposits and pledges in section of his work. According to Manu – “a sensible man should deposit has money with a person of good family, or good conduct, will acquainted with the Law, veracious, having many relatives, wealthy and honourable”. Reference is also made to the same in Kautilya’s Arthashastra. The Indian banks enjoyed considerable public confidence and this can be gauged from fact that hundis were used from the days of Mahabharata. During the Moghul Period, the indigenous bankers were most prominent in connection with the financing of trade and use of instruments of trade. From the early Vedic period right through the Moghul period as well as that of the East India Company’s rule until the middle of the 19th Century, indigenous bankers were the hub of the Indian Financial System providing credit not only to the trade but also to the Government.
l) Rural Banking: A set of financial institution engaged in financing of rural sector is termed as ‘Rural Banking’. The polices of financing of these banks have been designed in such a way so that these institution can play catalyst role in the process of rural development.
4. (a) Explain the differences between branch banking system and unit banking system. 14
Ans: Branch Banking System: Branch Bank is a type of banking system under which the banking operations are carried with the help of branch network and the branches are controlled by the Head Office of the bank through their zonal or regional offices. Each branch of a bank will be managed by a responsible person called branch manager who will be assisted by the officers, clerks and sub-staff. In England and India, this type of branch banking system is in practice. In India, State Bank of India (SBI) is the biggest public sector bank with a very wide network of 16000 branches.
According to Gold field and chandler,” A branch bank is a baking corporation that directly own two or more banking agencies.”
Thus branch banking is a system in which a bank renders its banking activities at two or more places. Head office has the overall control over the working of various branches.
Unit Banking System: Unit Bank is a type of bank under which the banking operations are carried by a single branch with a single office and they limit their operations to a limited area. Normally, unit banks may not have any branch or it may have one or two branches. This unit banking system has its origin in United State of America (USA) and each unit bank has its own shareholders and board of management.
According to Shapiro, Soloman and White,” An independent unit bank is a corporation that operates one office and that is not related to other banks through either ownership or control.”
The difference between branch banking and unit banking are as follows:
| Basis | Branch Banking | Unit Banking |
| 1. Operate | Under branch banking a big bank with a single institution and under single ownership operates through a network of branches. | Under unit banking an individual bank operators through a single office. |
| 2. Decision | There may be undue delay to take the decision centrally in branch banking. | The unit banking, the bank can take the decision quickly. |
| 3. Risk | Risk can be spread geographically by the system of branch banking. | The risk cannot be spread geographically this unit banking system. |
| 4. Managerial costs | Managerial costs are high in Branch Banking system. | Managerial cost is comparatively less in Unit Banking. |
| 5. Funds | Funds are transferred from one branch to another. | Funds are allocated in one branch and no support of other branches. |
| 6. Deposits and assets | Deposits and assets are diversified, scattered and hence risk is spread at various places. | Deposits and assets are not diversified and are at one place, hence risk is not spread. |
| 7. Specialisation | Division of labour is possible and hence specialisation possible. | Specialisation not possible due to lack of trained staff and knowledge |
| 8. Rate of interest | Rate of interest is uniformed and specified by the head office or based on instructions from RBI. | Rate of interest is not uniformed as the bank has own policies and rates. |
Or
(b) Explain the following: 7x2=14
1) Pure banking.
2) Wholesale banking.
Ans: 1) Pure Banking: Pure Banks are those which are established with the aim of providing only short term assistance to the business units. Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialize in short term finance only. This type of banking Is originated in UK and not popular in India.
2) Wholesale Banking
Wholesale or corporate banking refers to dealing with limited large-sized customers. Instead of maintaining thousands of small accounts and incurring huge transaction costs, under wholesale banking, the banks deal with large customers and keep only large accounts. These are mainly corporate customer. Wholesale banks are mainly engaged in financing, underwriting, market making, consultancy, mergers and acquisitions and fund management.
Features of Wholesale banking
a) Wholesale banking refers to that banking which targets corporate or big customers and their main focus is providing services to corporate clients.
b) In case of wholesale banking, ticket size of loan is very high and due to it impact of NPA is more pronounced.
c) Loans such as loan for setting industry, machinery advance, export credit are some of the examples of loans given in wholesale banking.
d) In case of wholesale banking due to low customer base it is easy to monitor as well recover the loan given to customers.
e) Wholesale banks offers high rate of interest to corporate customers in order to attract funds from them.
f) In case of wholesale banking small number of branches is sufficient to cater to corporate clients.
5. (a) Discuss the principles of sound investment policy adopted by Indian commercial banks. 14
Ans: Principles of Sound Investment: Banks should follow some basic principles at the time of investing funds. This ensures efficient and long term working of the banks. Some of the basic principles of sound investments are as follows
1) Safety of principal: The most important rule for granting/lending loans is the safety of funds. A banker deals in borrowed funds and therefore his main consideration is safety of principal invested in securities. Banks must ensure the solvency and sound financial position of the companies in which investments is made. The government and semi-government securities are the safest securities because they are guaranteed by the government.
2) Marketability or liquidity: The second important principle of sound investments is liquidity. Liquidity means possibility of converting investments into cash without loss of time and money. Thus, the banker should see that the security in which he invests his funds possesses a ready market i.e. they can be sold in the market without loss of time and money.
3) Return or Profitability: Return or profitability is another important principle. The funds of the bank should be invested in securities to earn highest return, so that it may pay a reasonable rate of interest to its customers on their deposits, reasonably good salaries to its employees and a good return to its shareholders. However, a bank should not sacrifice either safety or liquidity to earn a high rate of interest.
4) Price stability: The price of security selected by the banker should remain stable. The safety of investments depends on the stability in the prices of securities. Banker is not a speculator and hence his object of buying security should not be to gain on wide fluctuations in prices of the securities and should prefer those securities whose prices remain fairly stable over a period of time. The Prices of government securities remain stable and do not fluctuate. .
5) Diversification of Investment: One should not put all his eggs in one basket’ is an old proverb which very clearly explains this principle. A bank should not invest all its funds in one particular industry or security or company. In case that industry or company fails, the banker will not be able to recover his funds. Hence, the bank may also fail. So, the bank should diversify its investments in different industries and should invest in variety of companies with sound financial record.
6) Refinance: To ensure the liquidity of his investments the banker has to see that the security is eligible to obtain refinance from the Central Bank and other refinancing institutions.
7) Duration: In addition to the above factor, a banker also considers the duration and denomination of security and its future earnings prospects.
In conclusion, it may be said that for a banker the government and semi-government securities are most ideal for investment of funds. Government securities with virtually no risks, have a ready market, are eligible for refinance and bring reasonably good return.
Or
(b) Distinguish between the following: 7x2=14
1) Private sector banks vs. Indigenous banks.
2) SLR vs. CRR.
Ans: a) Indigenous Bankers vs Private Bankers
Indigenous Bankers: That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages. Banking in its crude from is as old as authentic history. All throughout the period of India history, indigenous bankers and money lenders are recorded to have existed and carried on the business of banking and money lending on a large scale. Between 2000 and 1400 BC during the Vedic Period records of deposits and lending are found. Renowned Hindu Law giver Manu has dealt with the matter of deposits and pledges in section of his work. According to Manu – “a sensible man should deposit has money with a person of good family, or good conduct, will acquainted with the Law, veracious, having many relatives, wealthy and honourable”. Reference is also made to the same in Kautilya’s Arthashastra. The Indian banks enjoyed considerable public confidence and this can be gauged from fact that hundis were used from the days of Mahabharata. During the Moghul Period, the indigenous bankers were most prominent in connection with the financing of trade and use of instruments of trade. From the early Vedic period right through the Moghul period as well as that of the East India Company’s rule until the middle of the 19th Century, indigenous bankers were the hub of the Indian Financial System providing credit not only to the trade but also to the Government.
Private sector banks: Private Sector Banks are those banks which are owned by group of private shareholders. They elect board of directors which manages the affairs of the banks. Some examples of private banks in India include The Lakshmi Vilas Bank Ltd., The Karur Vysya Bank Ltd., The City Union Bank Ltd., HDFC Bank, Axis Bank and son. These banks are registered and regulated by the Companies Act, 2013.
From the above discussion, we got the following differences
| Basis | Indigenous bankers | Private sector bankers |
| 1. Interest rate | Rate of interest is higher. | Rate of interest is less as compared to indigenous bankers. |
| 2. Processing time | Loan processing is quick due to less or no documental formalities. | Loss processing is slow because of scrutiny of documents. |
| 3. Regulation | These bankers are less regulated. | These banks are regulated by the Companies Act, 2013. |
| 4. Customisation | There is more flexibility and customised loans. | There is less flexibility and strict loan options due to regulations. |
b) Difference between SLR and CRR
Ans: Statutory liquidity ratio (SLR)
Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as % of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India.
Cash Reserve Ratio: All the banks operating in a country, beside, cash in hand also maintain certain cash with the Central Bank of the country. This is called cash reserve. In fact, maintenance of these cash reserves has been made compulsory by the Law and the Central Bank has been given the power to determine the percentage of cash to be kept as reserves. This is termed as cash reserve ratio. In case of emergency these cash reserve can be utilised by the banks to safeguard their liquidity position.
Difference between SLR and CRR
| Basis | SLR | CRR |
| Meaning | Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers. | Commercial banks have to maintain statutory cash reserve in the Reserve Bank of India against their time and Demand liabilities which is called cash reserve ratio. |
| Form | SLR includes most liquid asset and also include cash. | CRR include cash. |
| Deposit | Liquid assets are maintained with the bank itself. | Cash reserve is maintained with RBI. |
| Effect | It helps in meeting out the shortage of cash in contingent situation. | It controls excess money flows in the economy. |
| Regulates | It helps in increasing Credit in the economy | It improves the liquidity of the banks. |
6. (a) What is mobile banking? Explain about various services that mobile banking system can provide to its customers. 4+10=14
Ans: Telephone banking/Mobile Banking
Telephone banking is a service provided by a bank or other financial institution that enables customers to perform a range of financial transactions over the telephone, without the need to visit a bank branch or automated teller machine. Telephone banking times are usually longer than branch opening times, and some financial institutions offer the service on a 24-hour basis. Most financial institutions have restrictions on which accounts may be accessed through telephone banking, as well as a limit on the amount that can be transacted.
The types of financial transactions which a customer may transact through telephone banking include obtaining account balances and list of latest transactions, electronic bill payments, and funds transfers between a customer's or another's accounts.
From the bank's point of view, telephone banking minimises the cost of handling transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit transactions. Transactions involving cash or documents (such as cheques) are not able to be handled using telephone banking, and a customer needs to visit an ATM or bank branch for cash withdrawals and cash or cheque deposits.
Modern Services Provided by Bank through Mobile Banking
1. Centralized Banking Solution (CBS) = CBS, an inter-branch networking and data-sharing platform helps the customers to operate their account from any city in India having CBS networked branches, changing the status of customer from ‘Customer of the Branch’ to ‘Customer of the Bank’.
2. Online Tax Payment = Banks provide the facility of online payment of service tax, excise duty, DGFT, Custom duty and all charges under MCA 21 through internet banking.
3. Corporate Internet Banking = Online funds transfer, trade finance management, fund management, global access with unmatched benefits through banks’ corporate internet banking.
4. Online Shopping = This service facilitates the customers to book hotels, buy gifts, send flowers, buy books and lot of activities by making payments online.
5. Retail Internet Banking = Internet Banking assists the customers to have an online assess to bank account anytime and anywhere.
6. Foreign Exchange = Banks have several branches authorized for handling foreign exchange business and these branches.
7. E-Money India = Internet banking helps the customer in sending money to their loved ones in India through PNB’s e-Money India service.
8. Online Railway Reservation = Say goodbye to long queues. Banks offer the customers online booking and information through IRCTC payment gateway. Just click and travel comfortably.
9. Depository Service = Banks Depository service provides the facility of having shares and securities in Demat form and executes transactions of sales and purchase hassle free electronically to the customers through internet banking.
10. Electronic Clearing Service and Electronic Funds Transfer (EFT) = Internet banking assists the customers in electronic clearing service for quick movement of funds in a paperless mode and EFT to ensure an expeditious transfer of funds by using electronic media.
11. Online Bill Payment = No more queues to pay customers’ bills. Now the customers can pay their telephone, mobile, electricity, insurance and several other bills 24 hours, 365 days, from the desktop of customer.
12. Online Air Ticket Booking = Banks provide facility of online airline ticket booking of domestic as well as international airlines to their customers through internet banking.
13. Online Trading = Banks provide online trading facilities to customers having account with bank and trading account with approved brokers.
14. Customer Care Facility = Banks present 24 hours customer care facility for all customers quarries and problems.
15. Online Insta Remit-RTGS Service = Instant remittance by customer himself now made possible, from one bank to another bank at different centre’s on the same day with the help of Online Real Time Gross Settlement (RTGS)/National Electronic Fund Transfer (NEFT) at modest charges.
Or
(b) Describe the following: 7x2=14
1) Internet banking.
2) Revolving credit.
Ans: 1) E-Banking or Internet banking: Online banking also known as internet banking, e-banking, or virtual banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website. Internet banking is a term used to describe the process whereby a client executes banking transactions via electronic means. This type of banking uses the internet as the chief medium of delivery by which banking activities are executed. The activities clients are able to carry out are can be classified to as transactional and non transactional.
Advantages of E-banking or Internet banking
1) Convenience: Banks that offer internet banking are open for business transactions anywhere a client might be as long as there is internet connection. Apart from periods of website maintenance, services are available 24 hours a day and 365 days round the year. In a scenario where internet connection is unavailable, customer services are provided round the clock via telephone.
2) Low cost banking service: E-banking helps in reducing the operational costs of banking services. Better quality services can be ensured at low cost.
3) Higher interest rate: Lower operating cost results in higher interest rates on savings and lower rates on mortgages and loans offers from the banks. Some banks offer high yield certificate of deposits and don’t penalize withdrawals on certificate of deposits, opening of accounts without minimum deposits and no minimum balance.
4) Transfer services: Online banking allows automatic funding of accounts from long established bank accounts via electronic funds transfers.
5) Ease of monitoring: A client can monitor his/her spending via a virtual wallet through certain banks and applications and enable payments.
Disadvantages of E-banking Internet banking
1) High start-up cost: E-banking requires high initial start up cost. It includes internet installation cost, cost of advanced hardware and software, modem, computers and cost of maintenance of all computers.
2) Security Concerns: One of the biggest disadvantages of doing e-banking is the question of security. People worry that their bank accounts can be hacked and accessed without their knowledge or that the funds they transfer may not reach the intended recipients.
3) Training and Maintenance: E-banking requires 24 hours supportive environment, support of qualified staff. Bank has to spend a lot on training to its employees. Shortage of trained and qualified staff is a major obstacle in e-banking activities.
4) Transaction problems: Face to face meeting is better in handling complex transactions and problems. Banks may call for meetings and seek expert advice to solve issues.
2) Revolving credit: Under a Revolving Credit Facility a bank fixes up a credit limit to a borrower for certain period, say Rs.10 crore for 3 years period. The borrower will get a maximum credit facility of Rs.10 crore at any point of time once the loan is repaid. The borrower's facility automatically gets renewed up to Rs.10 crore during the 3 year period any number of times. In other words, the credit facility revolves around with a maximum of Rs.10 crore outstanding at any point of time over a 3 year period. In principle, under a Revolving Facility there is no formal repayment period. The borrower is allowed to draw, repay and again draw throughout the loan period.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. (a) Write True or False: 1x4=4
1) The first Presidency Bank in India was established in 1821. False, 1806
2) The Reserve Bank of India has five local boards for its supervision. False, 4
3) In the year 1980, 6 numbers of Indian commercial banks were nationalized. True
4) Foreign exchange market has no geographical location. True
(b) Fill in the blanks: 1x4=4
1) Capital market is the market for long term funds.
2) The Reserve Bank of India was established in the year 1935.
3) The full form of RTGS is Real Time Gross Settlement.
4) Scheduled banks are listed in the Second Schedule of RBI Act, 1934.
2. Write short notes on (any four): 4x4=16
a) Current deposit.
b) Lead bank scheme.
c) Cash reserve ratio.
d) Private banking system.
e) Money market.
f) ATM.
3. (a) Discuss the agency service of commercial banks. 11
Or
(b) Discuss about the classification of banks of India. 11
4. (a) What do you mean by branch banking and unit banking? Distinguish between them. 3+3+6=12
Or
(b) Discuss the main functions of regional rural banks. 12
5. (a) What is liquidity? State the factors that affect cash reserve of commercial banks. 3+8=11
Or
(b) Discuss the achievements of Indian commercial banks after nationalization. 11
6. (a) Explain the differences between money market and capital market. 11
Or
(b) Explain the following: 5+6=11
1) Interbank market.
2) Stock market.
7. (a) Discuss the advantages of Internet banking. 11
Or
(b) What do you mean by ‘bridge loan’? Describe the characteristics of bridge loan. 3+8=11
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